In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 30.23, little changed from last week’s 30.26, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 70.65, up from the prior week’s 69.41.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 26, unchanged from the prior week. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: In U.S. markets, it was the Dow…and then everyone else. The Dow Jones Industrial Average rose over 250 points last week closing at 21,830. The tech-heavy Nasdaq Composite fell 13 points to close at 6374, a decline of -0.2%. By market cap, large caps fared better than their smaller brethren. The S&P 500 large cap index gave up just -0.02%, while the S&P 400 mid cap index fell -0.65% and the small cap Russell 2000 retreated -0.46%.

Commodities: Gold gained ground for a third straight week, rising 1.63% to close at $1,275.30. Silver had similar price action, rising 1.45% to close at $16.69. Energy had an even better week. West Texas Intermediate crude oil surged over 8.6% ending the week at $49.71 a barrel.

U.S. Economic News: The number of Americans who applied for initial unemployment benefits increased slightly last week, but remained near its lowest level in decades. The Labor Department reported initial jobless claims for the week ending July 22 increased by 10,000 to 244,000. The less-volatile four-week moving average of claims remained unchanged at 244,000. New claims have remained under the key 300,000 threshold that analysts use to indicate a healthy jobs market for 125 straight weeks—its longest run since the early 1970’s. The number of people who have already been receiving unemployment benefits, so-called continuing claims, fell by 13,000 to 1.96 million. Continuing claims have been under the 2 million level for 16 straight weeks—an event not seen since 1973.

Sales of previously-owned homes fell to the slowest pace since February as limited supplies of homes for sale continue to weigh on the housing market. Existing home sales were at a seasonally-adjusted annualized rate of 5.52 million homes last month, according to the National Association of Realtors (NAR). The reading was 0.7% higher than the same time last year, but a 1.8% decline from May’s reading. In addition, it was the second lowest reading of the year. Supply continues to be the biggest factor affecting the existing home sale market, says NAR. Total inventory was down 7.1% from the same time a year ago, and at the current sales rate there is only a 4.3 month supply of homes on the market. Zillow’s Chief Economist Svenja Gudell said, “It’s difficult to sell homes when there are so few available to buy, and the chronic inventory shortage the market has been suffering from — bordering on an inventory crisis at this point — is now more than two years old.” The supply imbalance continues to push prices higher. The median sales price was $263,800, a 6.5% increase compared with the same time last year. That sets a fresh record and marks the 64th consecutive month of yearly price gains. Of concern to economists, housing prices are growing at roughly double the pace of wage gains and thus the rate of price growth is unsustainable.

New home sales increased for a second straight month, according to the Commerce Department. New home sales for June were at a seasonally-adjusted annual rate of 610,000, an increase of 0.8% from May. June’s reading was 9.1% higher than a year ago. The median sales price of a new home was $310,800 in June, a 3.3% decline compared to the same time last year. At the current sales pace there is a 5 month supply of homes on the market. Stephen Stanley, chief economist for Amherst Pierpont Securities said in a research note, “I am not worried about flagging demand, as builders and realtors have been very clear that the demand is there.”

Overall home prices (both new and existing) remained strong but eased slightly according to the S&P/Case-Shiller 20-city home price index. The index rose 5.7% in the three-month period ended in May compared to the same period the year before. The reading was down a slight 0.1% from the previous month. Of the 20 cities surveyed, nine reported greater price increases for the 12 months ending in May than in April. Seattle, Portland, and Denver showed the strongest growth. At the other end of the scale, Chicago was the weakest. The broader national index rose 5.6% for the year in May, matching April’s reading.

Confidence among consumers rose in July to its second highest level in 16 years, according to the Conference Board. July’s consumer confidence index rose to 121.1, a gain of 3.8 points from June. July’s confidence number was exceeded only by March’s reading of 124.9 when confidence had soared due to the high expectations surrounding the new Trump administration. Although his administration has struggled to pass meaningful pro-business reforms, Americans are still the most confident they’ve been in years. A significant factor supporting the high confidence readings is the strong labor market. The unemployment rate is currently at 4.3%, its lowest level since the turn of the century.

Manufacturing output in the United States reached a four-month high this month according to IHS Markit’s flash U.S. manufacturing Purchasing Managers Index (PMI). The index rose 1.2 points this month to 53.2, as readings for output, new orders, and employment all accelerated. IHS cited improving demand conditions and reduced risk aversion among manufacturers as reasons for the gain. In the services industry, Markit’s flash services PMI remained unchanged from the previous month at 54.2. Markit said services were able to maintain its level due to an “improving economic backdrop”. Overall, the composite (manufacturing+services) PMI rose 0.3 point to 54.2. Chris Williamson, chief business economist at IHS Markit said “The July PMI surveys show an economy gaining growth momentum at the start of the third quarter, enjoying the strongest monthly improvement in business activity since January.” Readings above 50 indicate growth.

Orders for manufactured goods expected to last three years or longer (so-called “durable goods”) surged to a three-year high last month, but unfortunately the gain was almost entirely due to a large aircraft order at Boeing. The Commerce Department reported that durable goods orders rose 6.5% last month as Boeing began processing nearly 200 orders for new aircraft following the Paris Air Show. Ex-aircraft and autos, orders were up only a slight 0.2%. Auto makers actually reported a decline in orders of -0.6%. Ex-transportation, other major industrial segments reported weak demand. Core capital goods orders, which are capital goods excluding aircraft and goods produced for the Defense Department, were down 0.1% in June. However on a positive note, core orders have risen 5.6% over the past 12 months—the fastest year-over-year rise since 2012.

In the Windy City, the Chicago Federal Reserve’s national economic activity index rose to a positive 0.13 in June, an increase of 0.43 from May. The index was supported by improvements in the manufacturing and employment components. May’s reading had been the lowest since August of 2016. The three-month moving average of the Chicago Fed’s index, smoothed to iron out monthly volatility, improved to a positive 0.06. Production-related indicators increased to a positive 0.09 in June, while employment-related indicators contributed a positive 0.06. The index is a weighted average of 85 economic indicators, designed so that a reading of zero represents economic growth, while a reading below -0.7 suggests a recession has begun.

U.S. Gross Domestic Product (GDP) grew at a 2.6% annual rate in the second quarter, according to the latest data from the Bureau of Economic Analysis. Consumer spending, the main driver of the U.S. economy, led the increase with a 2.8% gain, while business investment in equipment rose 8.2%.

International Economic News: Canada’s economic growth blew past expectations, led by a surge in oil production. According to Statistics Canada, real gross domestic product jumped 0.6% in May—triple the 0.2% growth that economists had predicted. The biggest contributor was a 7.6% surge in oil and gas extraction. The sector received a large boost from Syncrude Ltd’s Mildred Lake oilsands operation in Alberta which came back online. Wildfires in March had taken much of Canada’s oil production equipment offline. Compared to the same time last year, real GDP was up 4.6%–its fastest year-over-year growth since 2000. Krishen Rangasamy, senior economist at National Bank of Canada, breathlessly summed it up in a research note, “The Canadian GDP results were simply stunning.”

Across the Atlantic, the United Kingdom’s Home Office launched an independent review of the impact of European Union migrants on the nation’s economy. The independent committee was asked specifically to look at how EU migrants affect different sectors of the U.K. economy. More than 3 million citizens of other EU countries live and work in Britain, and many areas of the economy rely on foreign workers. Home Secretary Amber Rudd said that the government needs “the most accurate picture possible of the extent to which the U.K. economy uses EU labor.” The government says it will end free movement — a key principle of the EU — and impose immigration controls after Brexit. Rudd wrote “The U.K. must remain a hub for international talent. We must keep attracting the brightest and the best migrants from around the world.”

On Europe’s mainland, France’s economy expanded for a fourth consecutive quarter giving new President Emmanuel Macron the momentum he needs to push through his reforms. GDP rose 0.5% in the second quarter matching the pace of the previous two quarters. The expansion was driven by exports and investment, with net trade making its biggest contribution in more than seven years. In addition, both consumer confidence and business confidence are at their highest levels in several years. Ludovic Subran, chief economist at Euler Hermes in Paris said, “Everyone is thrilled that France is back but it doesn’t mean it’s out in front, it has simply returned to the pack.”

In Germany, business morale hit a record high as manufacturers dismissed concerns over a stronger euro and anticipated a surge in already robust exports. The Munich-based Ifo economic institute said its business climate index, based on a survey of about 7,000 firms, reached its third record high in the last three months. The index rose 0.8 point to 116.0 in July, beating a Reuters consensus forecast of 114.9. Ifo economist Klaus Wohlrabe said manufacturers were particularly optimistic, telling reporters “Hardly anything seems to be able to hit the German economy.” Ifo chief Clemens Faust said, “Sentiment among German businesses is euphoric. Germany’s economy is powering ahead.”

The Italian economy received a modest vote of support when the International Monetary Fund upped its growth forecasts for 2017 and 2018. Italian GDP is forecast to increase by 1.3% this year, according to the IMF. For 2018, the economy is forecast to grow by 1%, a gain of 0.2% over its earlier prediction. Prime Minister Paolo Gentiloni said the upgraded forecast “brings confidence and conviction about our country’s possibilities”. The rate of economic growth in Italy has been sluggish for the last three years. Italy’s jobless rate is around 11%, well above the Eurozone’s average of 9.3%.

China’s economy continues to hum, say multiple indicators from a variety of sources. Confidence expressed in surveys of small and medium-sized Chinese businesses as well as increased construction activity indicates continued resilience in the world’s second largest economy. Standard Chartered Plc’s Small and Medium Enterprise Confidence Index broke a three-month streak of declines and rose to 56 this month. The firm conducts a monthly survey of more than 500 Chinese companies. In addition, the China Satellite Manufacturing index published by San Francisco-based SpaceKnow Inc. increased 1 point to 50.5 in July. The firm uses commercial satellite imagery to monitor activity across thousands of industrial sites. Together with recent surveys of sales managers, steel mill executives, traders, and financial experts, the consensus view is that China’s economy continues to be robust.

In Japan, labor shortages have now hit a new extreme as the unemployment rate hits 2.8%. For the first time on record, the number of permanent jobs open now outnumbers the number of potential applicants. In June, the ratio of permanent job openings to applicants reached 1.01—the first time it rose above parity since records began. This suggests to analysts that the labor shortage is spreading beyond the ranks of just casual part-time jobs into the area of regular, salaried employees. After a multi-decade trend of companies offering workers insecure contract work, they are now being forced to offer permanent jobs in order to fill open positions.

Finally: Investment bank Goldman Sachs recently released research that reveals a different take on the relationship between present stock market valuations and future returns (see “The Very Big Picture” section of this report as well). Goldman reports that after periods of valuations in the top quartile of all historical valuations, the S&P 500 index has delivered single-digit or negative returns 99% of the time. In nearly a fifth of instances (17%), returns were negative. Unfortunately, current stock market valuations are solidly in that upper quartile.

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors was unchanged from the prior week’s 15.75, while the average ranking of Offensive DIME sectors rose to 15.75 from the prior week’s 16.25. The Offensive DIME sectors and Defensive SHUT sectors are now tied in rank. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 30.26, up from last week’s 30.10, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 69.41, up from the prior week’s 67.48.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 26, up 1 from the prior week’s 25. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Major U.S. market indexes recorded modest gains for the week with almost all indexes hitting new highs save for the Dow Jones Industrial Average. The Dow Jones Industrial Average shed 57 points to close at 21,580, a decline of -0.27%. However, the Nasdaq Composite continued to build on last week’s sharp gain by rising 1.19% to close at 6,387. By market cap, larger stocks barely edged out smaller stocks with the large cap S&P 500 index gaining 0.54% for the week, while the mid cap S&P 400 and small cap Russell 2000 each returned 0.49%.

Commodities: Precious metals built on last week’s gain with Gold rising an additional $27.40 to $1254.90 an ounce, a gain of 2.23%. Silver likewise rose, up 3.29% to close at $16.46 an ounce. Energy gave up some of last week’s gain. West Texas Intermediate crude oil fell -1.65% to close at $45.77 a barrel. Copper rose for a second week. The industrial metal, tracked by some analysts as a gauge of worldwide economic health, rose 1.17% – its second week of gains.

U.S. Economic News: The number of Americans applying for initial unemployment benefits fell by 15,000 last week to nearly a 44-year low of 233,000. The number remained below the key 300,000 threshold that analysts use to indicate a healthy jobs market. New applications for unemployment benefits have been under the 300,000 level for 124 consecutive weeks—its longest streak since the early 1970’s. The four week average of new claims, used to smooth out the weekly volatility, also remained at an extremely low level. The four week average fell by 2,250 to 243,750. The number of people that have been already collecting unemployment benefits rose by 28,000 to 1.98 million people. These so-called continuing claims have been under 2 million for 15 consecutive weeks, an event that last occurred in 1973. Continuing claims are reported with a one week delay.

Sentiment among the nation’s home builders diminished this month as rising costs for materials continued to take their toll. The National Association of Home Builders monthly confidence gauge fell two points to 64, whereas economists had expected an increase of one point. Notably, the index now stands at its lowest level since before the election. Then-candidate Donald Trump had addressed the trade group, pledging to roll back regulations, but has yet to deliver. In the details, every component of the sentiment index declined. Both the readings for current conditions and expectations for the coming six months fell two points to 70 and 73, respectively. Prospective buyer traffic also dipped a point to 48. In its release, the NAHB stated, “Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber. This is hurting housing affordability even as consumer interest in the new-home market remains strong.”

Despite the decline in sentiment, homebuilders broke ground on more homes in June and figures from the prior month were also revised upward. The Commerce Department reported housing starts rose 8.3% to a seasonally-adjusted 1.22 million annualized rate. Housing starts are up 2.1% for the year. The number of applications for building permits, an indicator of future building activity, rose 7.4% for the month to a pace of 1.25 million. For the year, permits are up 5.1%. The report was welcome news as many analysts had noted that labor shortages, land shortages, regulations, and rising lumber costs have all weighed on new construction.

A reading of manufacturing activity in the New York-region weakened in July following June’s two year high, according to the New York Federal Reserve. In its latest release, the New York Fed’s Empire State manufacturing index fell 10 points to a seasonally-adjusted reading of 9.8. The decline was worse than expected—forecasts were for a reading of 15. Readings for new orders, shipments, inventories, delivery times, and number of employees all decelerated. Nonetheless, the Empire State index has been positive for six out of the first seven months of 2017. Any reading above zero signals expansion.

In the city of brotherly love, manufacturers reported solid but slowing growth according to the latest report from the Philadelphia Federal Reserve. The Philadelphia Fed’s manufacturing survey fell 8.1 points to 19.5 this month. The result missed economists’ expectations for a reading of 22. The indexes for activity, new orders, shipments, employment, and work hours all remained positive, but weakened from earlier readings. Of note, the index for new orders plummeted to just 2.1 from a reading of 25.9 in June. Joshua Shapiro, chief U.S. economist at MFR Inc. released a research note stating, “The preponderance of recent survey data point to improving conditions in the manufacturing sector, and we expect the underlying trend of reported output to gradually accelerate in the months ahead. However, an ongoing inventory adjustment in the automotive sector will likely dampen headline factory output data over the near term.”

While the United States receives an enormous amount of goods from foreign countries, the latest Import Price index report from the Bureau of Labor Statistics shows that they are not bringing inflation along with them. The price of imported goods fell last month for the third time in four months, dropping 0.2%. The decline was largely due to the lower costs of imported oil. Annualized, the rate of import inflation slowed to 1.5%, a substantial retreat from January’s five-year high of 4.7% annualized. The decline is supported by other measures that track wholesale and consumer prices in the U.S., including the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, which has also tapered off in recent months. Stripping out energy, however, import prices actually rose a slight 0.1% last month. Over the past 12 months, ex-energy, the cost of imports have risen 1%.

International Economic News: In Canada, readings for core consumer prices and retail sales came in hotter than expected, signaling that overall inflation may rise enough to warrant another rate increase this year. Statistics Canada reported the average of the central bank’s three core inflation measures rose to 1.4% last month, a rise of 0.1% from May. Canadian retail sales came in double economists’ forecasts for May with a 0.6% increase. Fred Demers, chief Canada macro strategist at TD Securities said, “Seeing the core measures trend up, that’s quite comforting for the Central bank. The retail gain also puts the economy on track for another quarter of growth at faster than a 3 percent annualized pace, meaning another rate increase in October is a very likely scenario.”

According to research firm Price Waterhouse Cooper’s (PwC) UK Economic Outlook, the UK economy is on course for an even deeper slowdown as consumer spending and business investment continue to suffer from the uncertainty surrounding the upcoming Brexit negotiations. According to PwC, Britain’s GDP is expected to drop to 1.5% growth this year and 1.4% in 2018. Consumer spending has been a key driver of the UK economy, but higher inflation and sluggish wage growth have weighed on household spending. PwC’s chief economist John Hawksworth said Brexit uncertainty has also restrained business investment as firms have held off large capital expenditure plans. In addition, CNBC is reporting that British finance minister Philip Hammond told the board of U.S. investment bank Goldman Sachs that he was pushing for a “lengthy transition period” after Britain leaves the European Union to help banks prepare for Brexit and ease concerns of a “cliff-edge” exit from the bloc.

In France, Economy Minister Bruno Le Maire kicked off Brexit negotiations on a less than amicable note by proclaiming “We want our money back.” Le Maire said that Britain must pay what it owes to the European Union and that it is a non-negotiable prerequisite for Brexit talks. The EU wants London to accept a bill to cover its share of European Union spending commitments that were made while Britain was a member—an amount which Le Maire said could be up to 100 billion euros ($115 billion). EU diplomats have warned that chief negotiator Michel Barnier is prepared to “stall” talks unless the U.K. presents proposals for calculating the U.K.’s financial obligations to the bloc.

The German economy is humming and set for solid growth despite external concerns such as the outcome of Brexit negotiations or U.S. President Donald Trump’s trade policies the German Finance Ministry stated this week. In its monthly report the ministry said, “The current picture of economic indicators suggests that the economic upswing continued vigorously in the second quarter.” Gross domestic product (GDP) likely expanded in the second quarter at a similar rate as the first quarter when the economy grew by 0.6%. The International Monetary Fund also raised its growth forecast for the German economy. It now expects the German economy to expand by 1.8% in 2017 and by 1.6% in 2018 in real terms.

In Asia, Chinese economic growth topped lofty expectations yet again last quarter with GDP expanding 6.9% from a year earlier. The figure was the tenth consecutive GDP report where the year-over-year growth rate met or exceeded economists’ forecasts—a remarkable run of stability compared to other major economies over the same period (or,perhaps, a remarkable run of “managed” numbers, as some suspect). For the second quarter, China’s National Bureau of Statistics (NBS) reported that the economy grew by a seasonally-adjusted 1.7%, in line with expectations and a 0.4% increase over the first quarter. The NBS said in its release, “Generally speaking, the national economy has maintained the momentum of steady and sound development in the first half of 2017, laying a solid foundation for achieving the annual target and better performance.” The Chinese government previously stated that it is aiming for a minimum growth rate of 6.5% this year, a result that looks more than achievable given the strength seen in the first half of the year.

Japan’s exports rose for a seventh consecutive month, led by shipments of cars and electronics. Ministry of Finance data showed that June exports grew 9.7% year-over-year, a 0.2% increase over economists’ expectations. Over the first half of the year, Japan logged a 1.04 trillion yen ($9.3 billion) trade surplus as exports surged to Asia. In the details of the report, exports to China increased 19.5% from a year earlier. Shipments to the U.S. rose 7.1%, while exports to the E.U. were up 9.6%. Toru Suehiro, senior market economist at Mizuho Securities said, “The world economy has been in its expansion phase and Japan has been benefiting from increased exports.”

Finally: “Hooray for the 1%” isn’t a cheer leaving most American’s lips, let alone anything they want to hear. But according to a recently released study by the Tax Foundation, most Americans would be surprised to learn that the richest percent of Americans pay over 39% of all Federal Income Tax! In absolute dollars, out of the $1.37 trillion collected from taxpayers, the richest 1% were responsible for over $542 billion of that amount. In fact, the richest 1% pay almost double the amount the next highest bracket pays: those with earnings in the top 2% to 5%, pay 20.5% of all Federal Income Tax. Surprising to most, the bottom 50% of all taxpayers pay just 2.8% of total taxes. Note that each section of this graphic excludes the next (e.g., the top 5% excludes the top 1%, etc).

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 15.75 from the prior week’s 16.25, while the average ranking of Offensive DIME sectors fell to 15.75 from the prior week’s 15.50. The Offensive DIME sectors and Defensive SHUT sectors are now tied in rank. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 30.10, up from last week’s 29.68, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 67.48, up from the prior week’s 65.72.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 25, up 1 from the prior week’s 24. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks rose for the week, lifting the large cap indexes to new all-time highs. The Dow Jones Industrial Average and the S&P 500 both touched new intraday highs; however it was the technology-heavy Nasdaq Composite that performed the best of the major indexes. The Dow Jones Industrial Average added over 223 points to close at 21,637, a gain of 1.04%. The Nasdaq Composite gained over 159 points to close at 6,312, a rise of 2.59%. By market cap, large caps edged smaller cap indexes as the large cap S&P 500 index rose 1.4%, while the mid cap S&P 400 index added 1.03% and the small cap Russell 2000 gained 0.92%.

Commodities: Precious metals regained some of their luster after falling for five consecutive weeks. Gold managed to rebound 1.47%, or $17.80, to close at $1,227.50 an ounce. Silver gained 3.29% to close at $15.93 an ounce. Oil managed to retrace last week’s decline, rising 5.22%, or $2.31, to close at $46.54 per barrel of West Texas Intermediate crude oil. The industrial metal copper, used by some analysts as an indicator of global economic health due its variety of uses, rose 1.66%.

U.S. Economic News: The number of Americans who applied for initial unemployment benefits retreated slightly in June, a further indication of the extremely low level of layoffs as the economic recovery stretches into its ninth year. The Labor Department reported initial jobless claims in the week ending July 8th dropped by 3,000 to a seasonally-adjusted 247,000. Initial claims count the number of people who apply for benefits after losing their jobs. New applications for benefits have remained under the 300,000 threshold that analysts use to indicate a “healthy” jobs market for 123 consecutive weeks—its longest run since the early 1970’s. The less-volatile four-week moving average of claims, which gives a more stable picture of layoff trends, rose 2,250 to 245,750. Layoffs have been near their lowest level in almost 50 years and show no signs of rising. Continuing claims, the number of people already receiving benefits, came in at 1.95 million. Continuing claims have been under 2 million for 14 straight weeks, an event last seen in 1973.

The number of job openings in the United States fell by over 300,000 in May to 5.66 million—one month after reaching its second highest level ever. According to the government’s Job Openings and Labor Turnover Survey, known as the JOLTS report, the reduction appears to have been due to a big surge of 429,000 people hired in May—its biggest increase since March 2004. The JOLTS survey is a broader look at labor-market trends that uses a different set of criteria to assess the jobs market than the monthly employment report. The “quits” rate, which measures the number of people leaving their jobs by choice (presumably for a better job), rose a tick to its post-recession high of 2.2%. The higher number is interpreted by analysts as workers being confident enough about the economy to more readily change jobs. Overall, the report points to a strong labor market in which companies are hiring, layoffs remain near decade lows, and most people who want a job are able to find one.

Sentiment among small business owners continued to decline as the gridlock in Washington continued to weigh on economic expectations. The National Federation of Independent Business (NFIB) reported their monthly sentiment tracker ticked down 0.9 points to 103.6—its fifth-straight month of negative or unchanged readings. The index is now halfway between its pre-election reading of 98.4 and its high of 105.8 following the Trump election surge. In its release, the NFIB stated that sentiment has “sustained” the post-election surge, but warned that small business owners are losing patience with policymakers’ inability to pass health care and tax reform legislation. The NFIB noted that “Gridlock is driving down small business optimism, which will eventually drive down the economy.” In June, four of the index’s 10 components increased, while five declined and one remained unchanged.

Sentiment among consumers also declined, according to the latest preliminary survey from the University of Michigan. Confidence in future economic prospects continued to decline in early July pushing the University of Michigan’s Consumer Sentiment index down to 93.1. Economists had expected sentiment to hit 95 this month. Richard Curtin, chief economist for the University’s survey said in its statement, “Overall, the recent data follow the same pattern repeatedly recorded around past cyclical peaks: expectations start to post significant declines while assessments of current economic conditions continue to reach new peaks.” Mr. Curtin hastened to clarify the statement, saying the current data does not suggest an impending recession, “much steeper declines in expectations typically precede recessions.”

Sales at retailers across the country fell 0.2% last month marking their second consecutive drop and matching their biggest decline of the year, according to the Commerce Department. The disappointing sales figures suggests that the U.S. has not rebounded quite as strongly in the second quarter following tepid growth in the first quarter. In the details of the report, most retail segments posted weaker results last month. Gas station sales saw the biggest drop, falling 1.3%, followed by sales at grocers, restaurants, book stores, sporting-goods stores, and department stores. Of note, auto dealers reported only a slight increase in sales, but they are not selling cars as quickly as they were a year ago. Slower auto sales can have a powerful impact on the economy since they account for about 20% of all retail spending.

Inflation at the wholesale level rose slightly last month but its rate of rise slowed from recent readings. According to the Bureau of Labor Statistics, the producer-price index (PPI) rose just 0.1% last month—economists had predicted no change in the PPI. After rising steadily last year and the first half this year, inflation has slowed down in recent months. The decline has senior central-bank officials questioning whether further rate increases in the near future are warranted. Other inflation indicators such as the Consumer Price Index and the Federal Reserve’s preferred gauge, the Personal Consumption Expenditures (PCE) index also show inflation stalling. The PCE has slowed to an annualized rate of 1.4%, from the 2.1% high set earlier this year. Ryan Sweet, director of real-time economics at Moody’s Analytics stated, “The PPI suggests that there isn’t a significant amount of price pressures in the pipeline.”

At the consumer level, the prices Americans paid for goods and services were unchanged in June according to the Bureau of Labor Statistics. The Consumer Price Index (CPI), known also as the cost of living index, slowed to an annualized 1.6% in June, down 0.2% from May’s reading and down from its five-year high of 2.7% five months ago. In the details of the report, energy prices declined 1.6% as Americans paid less for gasoline, natural gas, and electricity. In addition, the cost of food leveled off after five consecutive increases. Stripping out the volatile food and energy categories, inflation rose 0.1% in June. Over the past 12 months the so-called core CPI is up 1.7%.

The Federal Reserve said that a shortage of qualified workers in the U.S. has “limited” hiring and that companies don’t appear to be raising wages to attract jobseekers. The remarks came from the Federal Reserve’s so-called “Beige Book” – its regular survey of business conditions around the country. The report said economic growth was “slight to moderate” from late May through June—slightly less upbeat compared to May’s report. The ultra-tight labor market with unemployment near a 16-year low of 4.4% was frequently given as a headwind by respondents to the survey. The Minneapolis Federal Reserve said “Employment was held back by tight labor availability”, while the Philadelphia Fed said “Workers appear to have less loyalty on the job, and more job-hopping is showing up on resumes.” While companies have offered more pay to some workers with specialized skills, the Fed found no broad increase in wages. One reason offered is that companies feel they can’t pass costs onto price-conscious consumers. With wages rising only modestly, some senior Fed officials believe inflation is likely to remain on the low side for a longer period than the central bank now predicts. The weak inflation data gives the Fed more latitude with the timing of its next interest rate hike.

International Economic News: The Bank of Canada raised its benchmark interest rate for the first time in seven years, to 0.75%. The 0.25% rate hike came amid expectations of stronger economic growth this year. The bank had cut interest rates by a quarter of a percentage point twice in 2015 to help the economy deal with the plunge in oil prices. In its release the bank stated that “Growth is broadening across industries and regions and therefore becoming more sustainable.” In its outlook for the Canadian economy, the Bank of Canada estimated growth to be 2.8% this year, 2.0% next year, and 1.6% in 2019. The rate increase was widely expected following “hawkish” comments by Bank of Canada governor Stephen Poloz and senior deputy governor Carolyn Wilkins in recent weeks.

The U.K. economy is slumping as business output falls and consumer spending continues to shrink, according to two sets of data released this week. The latest BDO Output index, which measures how businesses expect their order books to develop over the next three months, fell half a point to 94.9 in June leaving business output at a four-year low. The reading puts UK business into contraction, which is measured as any figure below 95.0. In addition, the UK services sector, which represents the bulk of the economy, is also experiencing stagnant economic growth. The latest Markit PMI data showed a 0.4 point drop to 53.4 for June. Duncan Brock, director of customer relations at CIPS, which helps compile the Markit survey, said political uncertainty related to Brexit and June’s general election had driven the slowdown.

Across the channel on Europe’s mainland, France will cut the processing time for asylum requests and boost housing for refugees while “systematically” deporting illegal economic migrants Prime Minister Edouard Phillipe said. France received over 85,000 asylum requests last year and is struggling with its system that President Emmanuel Macron described as “completely overwhelmed”. France has been criticized by charity groups for its inadequate facilities leading to the formation of camps in northern France and around Paris. In striking a balance between humanitarian concern for refugees and observing a tough policy on handling economic migrants, Philippe said “We are not what France should be.”

French President Emmanuel Macron admonished Germany for benefiting from the troubles of other euro countries and warned that the Eurozone cannot survive on such foundations. Mr. Macron said the monetary union has become a deformed project that is corrosive to the weaker economies to the advantage of the creditor states. Mr. Macron insisted that the EU must be rebuilt in a radically different way, requiring wholesale changes to the EU Treaties. “It doesn’t work because it has brought about divergences. Those that are already indebted have become more indebted: and those that are competitive have become more competitive,” he said. The remarks came as German exports rose even more strongly in May than previously expected. Germany’s Federal Statistics Office reported seasonally adjusted exports climbed for a fifth consecutive month, rising 1.4%, while imports also rose 1.2%.

In Asia, a new survey from the Pew Research Center reveals that the prevailing view among people around the world is that the U.S. is still the world’s leading economic power, but a surprising number of nations said China. Furthermore, many of the respondents live in nations that are key U.S. trading partners and allies. Of the 38 nations polled, a median 42% said the U.S. is the world’s leading economy, while 32% named China. However, in a lopsided seven of the ten European Union nations in the study (including Spain, France, and Germany), China is considered the world’s leading economic power. In Australia, a nation with heavy trade with China, China leads the U.S. by a shocking two-to-one margin. Emerging market countries such as Brazil, Mexico, and the Philippines also now see China as the top economic power in the world. “Following the onset of the financial crisis nearly a decade ago, Europeans increasingly named China, rather than the U.S., as the world’s leading economic power,” the report said.

The Japanese government and the European Union agreed in principle to a trade pact after more than four years of talks. The announcement on the Economic Partnership Agreement (EPA) was hailed by an official Japan-EU statement as “highly ambitious and comprehensive”. Japanese Prime Minister Shinzo Abe remarked, “Amid moves of protectionism, we demonstrate our commitment to raising the banner of free trade.” Proponents said the deal would significantly lower trade barriers between Japan and the EU for a wide array of products. Japan had previously focused much of its efforts on the Trans-Pacific Partnership trade pact, until U.S. President Donald Trump quickly decided to pull the U.S. out of negotiations over the pact. Trump’s move accelerated talks between Japan and the EU.

Finally: July 11th, Tuesday of this past week, was the third annual “Amazon Prime Day”. This year’s Prime Day smashed last year’s Prime Day sales record by more than 60% and now stands as the biggest sales day in Amazon’s entire history. Even more remarkable, as research firm Morningstar points out, is that the number of households with Amazon Prime video streaming is nearing the total number of homes with cable or satellite TV. According to estimates from Morningstar, nearly 79 million households now have an Amazon Prime membership, up from 66 million at the end of 2016. This compares to a projected 90 million households that pay for cable or satellite TV. Amazon doesn’t disclose the number of Prime members, so Morningstar’s estimates are based on an analysis of Amazon’s cash-flow statements. On the day after Prime Day, Amazon said they had more new members joining the Prime subscription service on Prime Day than any other single day in history. The following chart, from tech-industry commentary site “recode.net”, shows the skyrocketing Prime membership nearly intersecting the flat-to-declining cable-TV subscribership.

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 16.25 from the prior week’s 15.00, while the average ranking of Offensive DIME sectors rose to 15.50 from the prior week’s 17.00. The Offensive DIME sectors have taken the lead from the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.68, essentially unchanged from last week’s 29.66, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 65.72, down from the prior week’s 67.83.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 24, up 1 from the prior week’s 23. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Major U.S. indexes all finished in the green for the holiday-shortened week—but just barely. While the larger-cap benchmarks recorded modest gains, the smaller indexes managed to close just barely positive. The Dow Jones Industrial Average rose 64 points to close at 21,414, a gain of 0.3%. The technology-heavy Nasdaq Composite added 0.2%, ending the week at 6,153. The market cap indexes were all a tiny bit positive: the large cap S&P 500 rose 0.07% while the mid cap S&P 400 gained 0.04% and the small cap Russell 2000 added 0.03%.

International Markets: Canada’s TSX fell for a second week, declining just over 1%. In Europe, major markets were all in the green. The United Kingdom’s FTSE rebounded half a percent after five straight weeks of declines. On Europe’s mainland, France’s CAC 40 rose 0.48%, along with Germany’s DAX which rose 0.52%. Italy’s Milan FTSE surged over 2.09%. Asian markets were mixed. China’s Shanghai Composite gained 0.8%, while Japan’s Nikkei was off -0.5%. Hong Kong’s Hang Seng reversed last week’s rise falling -1.6%. As grouped by Morgan Stanley Capital Indexes, developed markets as a group and emerging markets as a group both ended the week down -0.6%.

Commodities: Precious metals retreated for a fourth consecutive week. Gold fell $32.60 to $1,209.70 an ounce, a loss of -2.6%. Silver plunged over 7.2% to end the week at $15.43 an ounce. In energy, oil retraced most of last week’s rise falling -3.9% to $44.23 per barrel of West Texas Intermediate crude oil. Copper, seen by some as an indicator of world economic health, also retraced most of last week’s gain by falling -2.3%.

U.S. Economic News: The number of Americans who applied for new unemployment benefits rose slightly the last month of June, but remained near its lowest level in years. The Labor Department reported initial jobless claims increased 4,000 to a seasonally-adjusted 248,000. Initial claims count the newly unemployed who apply for benefits after losing their jobs. New applications for benefits have been under the 300,000 threshold for 122 straight weeks, its longest stretch since the early 1970’s. Below the 300,000 level is traditionally considered a “healthy” jobs market. The four-week moving average claims, used by analysts to smooth the weekly volatility, rose a meager 750 to 243,000. The U.S. has added over a million jobs during its eight year recovery. Continuing claims, the number of people already receiving benefits, totaled less than 2 million for the 12th straight week—its longest streak since 1973. On Friday, the Labor Department announced that the U.S. created 222,000 new jobs last month and that hiring was stronger during the spring than previously reported. The unemployment rate rose a slight 0.1% to 4.4% as more people entered the labor force in search of work. Economists had predicted an increase of only 180,000 nonfarm jobs.

The nation’s manufacturers are growing at their fastest pace in almost three years, according to the latest data from the Institute for Supply Management (ISM). The ISM manufacturing index rose 2.9 points to 57.8 last month to its highest reading since mid-2014. Analysts attributed the rise to improving economic conditions both at home and abroad. In the details of the report, 15 out of 18 industries tracked by ISM were expanding their operations. New orders and production both experienced sharp gains and employment plans hit the second highest level since 2011.

The ISM nonmanufacturing (or “services”) index rose 0.5 point to 57.4 in June. Consensus forecasts were for a reading of 56.5. The improvement in services bodes well for the overall economy as the service sector makes up roughly 70% of the U.S. economy. Of the 17 industries tracked, ISM’s index showed improvement in 16. Using past relationships with GDP, June’s reading historically corresponds to an annualized growth rate of 3.3%.

Spending on construction in May was essentially unchanged when compared to the upwardly revised April data, the Commerce Department reported. Outlays for all construction projects were at a seasonally-adjusted $1.23 trillion, about 1% higher than in April. Economists’ had forecast a 0.3% decline for May. Overall, the spending data tends to be very volatile and analysts traditionally report having difficulty using the data for actionable investment decisions—still, total construction spending for the first five months of this year are up 6.1% over the same period last year. Ian Shepherdson, chief economist at Pantheon Macroeconomics states, “Overall, construction is set to make a modest contribution to Q2 GDP growth via the housing and public components, but we hope for much better in the second half as developers respond to significantly stronger home sales.”

The Federal Reserve released the minutes from its June 13-14 Federal Open Market Committee meeting revealing that “several” members were in favor of starting the reduction of its $4.5 trillion balance sheet within a “couple of months”. The statement only indicated that the process would start this year, without indication of the extent. In addition, members were divided between those comfortable with the unemployment rate and those concerned about a “substantial and sustained unemployment undershooting” that could trigger inflation or financial instability. The minutes also showed concern among members that financial conditions have remained loose even as the Fed has embarked on an interest rate hiking cycle.

The trade deficit fell 2.3% in May, primarily due to fewer imports of cellphones and other consumer goods. The deficit stood at $46.5 billion in May, down $1.1 billion from April according to the Commerce Department. Economists had forecast a $46.3 billion gap. Exports continued to improve. The U.S. shipped $192 billion worth of goods and services to other countries, a 0.4% increase. Exports hit their highest level in more than two years. Imports fell a slight 0.1% to $238.5 billion. For the first five months of 2017, the U.S. deficit was 13% higher than the same time last year. In the details, the deficit with Mexico rose to $7.3 billion, its highest level in a decade. Imports from Canada, our biggest trading partner, were at a two-year high. With China, the trade gap widened to $31.6 billion, while with Germany the deficit declined.

International Economic News: Trade data from Statistics Canada showed that both exports and imports hit record highs in May. Imports rose 2.4% on the month and have increased for six consecutive months. Imports of motor vehicles and parts rose strongly and aircraft imports jumped pushing overall imports higher. The Bank of Canada has become more optimistic in its outlook for economic growth, but concerns have lingered over the outlook for exports. Total exports increased 1.3% for the month to a record high $48.7 billion. The overall growth in trade volumes should reinforce confidence in Canada’s economic strength in anticipation of an interest rate decision on July 12th. Markets are increasingly expecting a hike to come soon as the economy recovers from the prolonged shock caused by low oil prices.

The UK economy suffered a blow as the latest trade data came in weaker than expected. In the three months to May, Britain’s trade deficit widened to 8.9 billion pounds, up 2 billion pounds from the previous quarter. The widening deficit was primarily due to the increase in the import of cars, aircraft, ships, oil, and electrical machinery from non-EU countries, the Office for National Statistics reported. The concomitant drop in services exports also contributed to the fall. The news was unwelcome to Bank of England policymakers who had hoped that an improvement in exports and investment would compensate for the fall in consumer spending in recent months. Separately, UK manufacturing output fell 0.2% in May, cancelling out April’s rise and missed forecasts for a modest rise.

Across the Channel in France, Chinese President Xi Jinping and French President Emmanuel Macron agreed to promote bilateral relations and cooperation. The Chinese state news agency quoted Xi as saying, “The Chinese side is willing to make concerted efforts with the French side to continue to view the bilateral relations from a strategic height and a long-term perspective, and work for a better development of our ties.” Both China and France are permanent members of the UN Security Council. Xi proposed that the two countries increase high-level exchanges and consider each other’s core interests and major concerns based on the principles of mutual respect, trust, understanding and accommodation. In addition, Russian President Vladimir Putin noted an improvement of economic ties with France at his meeting with Macron. “Despite all difficulties, the economic ties (between Russia and France – TASS) are improving, and the trade turnover is on the rise,” Putin said. “We expect the Russian-French council for economic, financial, industrial and trade issues to work hard,” he added.

In Germany, tens of thousands of people turned out for large protests against the G-20 meetings in Hamburg. The G-20 (or Group of Twenty) is an international forum for the governments and central bank governors of the world’s 20 largest economies. Peaceful protests Saturday were bracketed by violent rioting Friday and Saturday nights. Cars, barricades, and trash cans were set on fire, stores were looted, and rioters threw bottles and stones at police. The meeting of the world’s most powerful leaders has drawn a wide range of protestors to the city, ranging from economic equality groups, socialists, anarchists and communists to climate activists. German Chancellor Angela Merkel has taken considerable heat over hosting the meetings in Hamburg, Germany’s second largest city.

A trade report published this week suggests that Chinese trade with North Korea was up 15% during the first five months of the year. The news provoked a tweet from U.S. President Donald Trump remarking, “So much for China working with us – but we had to give it a try!” Trump has repeatedly indicated that he wants Chinese President Xi to sanction North Korea or stop trading with the country entirely for its continued ballistic missile testing and provocations. China is by far North Korea’s most significant trading partner. Customs data show total trade in the first five months of this year rose 15 percent from a year earlier, driven by North Korea’s purchases of Chinese oil and consumer goods. China bought more iron ore but suspended purchases of coal, a key North Korean export. Total trade between the two countries for the first five months of the year was just over $2.1 billion—a tiny percent of China’s massive total world trade volume.

Confidence among Japan’s biggest manufacturers rose for the third consecutive quarter to its best level in more than three years according to a key Bank of Japan survey. The survey, known as the Bank of Japan’s Tankan report, is a quarterly survey of more than 10,000 companies. The key index rose 5 points to 17—its highest since the first quarter of 2014. Marcel Thieliant, senior Japan economist at Capital Economics said, “The jump in the Tankan’s headline index for large manufacturers suggests that economic activity accelerated last quarter. Capacity shortages have intensified and manufacturers are reporting the smallest declines in output prices since 2008.” The Tankan survey is the broadest indicator of how the Japanese economy is faring.

Finally: It’s been a bad couple of weeks for the cable news outfit CNN. Multiple accusations of airing “fake news” stories (with several editors, reporters and producers fired as a result), veiled threats to individual Reddit.com users, and a couple of embarrassing undercover videos from Project Veritas that showed CNN producers themselves admitting their own news is “mostly bull—-“ are just a few of the gaffes, unforced errors and outright falsehoods that have dogged CNN of late. In response, viewers seem to be voting with their feet. According to Adweek.com, for the final week of June CNN’s primetime shows even managed to draw fewer viewers than decades-old reruns of “Yogi Bear”, “Full House” and “Friends”. The chart below tracks the steep decline in viewership among the coveted 25-54 demographic group.

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 15.00 from the prior week’s 11.50, while the average ranking of Offensive DIME sectors rose to 17.00 from the prior week’s 18.75. The Offensive DIME sectors sharply reduced the lead of the Defensive SHUT sectors had. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.66, down slightly from the prior week’s 29.87, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 67.83, down from the prior week’s 70.27.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 23, unchanged from the prior week. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: The major U.S. benchmarks finished the week mixed after a volatile span with unusually high trading volumes for this time of year. As was the case last week, the technology-heavy Nasdaq Composite experienced the widest swings, this time to the downside. The Dow Jones Industrial Average fell 45 points ending the week at 21,349, a decline of -0.21%. The Nasdaq Composite declined over 124 points to close at 6,140, a loss of -1.99%. The Nasdaq 100 Index, with higher concentrations of tech high-flyers, fell even further – down -2.69%. By market cap, large caps lagged their smaller cap brethren. The large cap S&P 500 fell -0.61%, while the S&P 400 mid cap index managed a gain of 0.15%, and the small cap Russell 2000 eked out a 0.04% gain.

Commodities: Gold retreated a fourth straight week by falling -1.12%, to $1,242.30 an ounce. Silver likewise ended the week down, retreating -0.12%. Oil rebounded after five weeks of losses, surging a substantial 7.04%. West Texas Intermediate crude oil closed at $46.04 a barrel. Copper, also known as “Dr. Copper” by some analysts for its reputed ability to forecast world economic growth, rose for a second straight week, gaining 3.32%.

June Summary: The small cap Russell 2000 led the other domestic indexes with a 3.3% rise in June. The Dow Jones Industrial Average managed a 1.62% rise followed by the S&P 400 mid cap index which added 1.45%. The S&P 500 rose a much more modest 0.48%. On the other hand, the Nasdaq Composite and Nasdaq 100 index finished the month in the red, falling -0.94% and -2.45% respectively as many tech high-fliers lost altitude. Major markets in Asia were in the green for June. China’s Shanghai Composite led international markets by gaining 2.4%, followed by Japan’s Nikkei and Hong Kong’s Hang Seng which rose 1.95% and 0.41% respectively. In Europe, all major markets finished June in the red. The United Kingdom’s FTSE retreated -2.76% while Italy’s Milan FTSE fell -0.71%, Germany’s DAX gave up -2.3%, and France’s CAC 40 fell -3.08%. As grouped by Morgan Stanley Capital Indexes, developed markets retreated -1.3% in June, while emerging markets gained 0.46%. Copper rose 5.08% in June, while oil fell for its fourth straight month, down -4.72%. Precious metal were also weaker, with Gold falling -2.6% and Silver falling -4.48% in the month.

U.S. Economic News: The number of Americans applying for new unemployment benefits rose slightly last week but remained comfortably below the threshold analysts use to indicate a “healthy” jobs market. The Labor Department reported initial jobless claims in the week ending June 24 rose by just 2,000 to a seasonally-adjusted 244,000. New applications for benefits have been under 300,000 for 121 consecutive weeks—the longest run since the early 1970’s. The smoothed four-week average of new claims fell by 2,750 to 242,250. Analysts use the smoothed average to iron out the week-to-week volatility. In addition, the number of people already receiving benefits registered fewer than 2 million for the 11th straight week. The last time the number of so-called continuing claims were consistently under 2 million was in 1973.

Home prices pulled back slightly but remained strong according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. The S&P/Case-Shiller 20-city index rose 5.7% in the three-month period ending in April compared to the same period a year ago—a slight decrease from the 5.9% annual increase in March. Economists had expected a reading of 5.9%. Despite the slight deceleration, prices continued to reflect healthy demand. Only one of the metro areas in the 20-city index saw a monthly decline, Cleveland, while in Seattle prices surged 2.6%. Seattle also led the annual gain, with a 12.6% gain over a year ago. Portland, Dallas, and Denver were close behind. Nationally, the index retreated slightly to a 5.5% annual growth rate in April from 5.6% in March.

Pending home sales – the number of homes under contract, but not yet closed – declined for a third-straight month in May. The National Association of Realtors (NAR) pending home sales index slid 0.8% to 108.5, while April’s reading was revised lower. Analysts view the reading as another sign that the housing market may be cooling off – or the market is being artificially constrained by there being simply too few homes to sell. The index was down 1.7% from the same time last year. No region saw an increase in May. In the Northeast, the index fell 0.8%, while in the South it slid 1.2%. In the West, pending home sales fell 1.3%, while in the Midwest the index was unchanged. Currently, only the index for the Northeast is higher than its level a year ago. The NAR again attributed the decline to a dwindling supply of available homes. In its release, the group’s chief economist Lawrence Yun wrote, “Buyer interest is solid, but there is just not enough supply to satisfy demand. Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast.”

The Commerce Department reported real GDP rose 1.4% in the first three months of the year, growing twice as fast as the government initially reported. The improved reading stems mostly from stronger exports and an increase in consumer spending on healthcare and financial services. Consumer spending was by far the biggest influence on GDP, revised up 0.5% to 1.1%. Most of the increase was due to higher spending on professional services: doctor visits, hospital stays, investment advice, and insurance. In addition, export growth grew 7%, an increase of 1.2% over the initial report. In the details, most of the other key figures in the GDP report—business investment, inventories, government spending, and inflation were little changed.

Orders for items expected to last three years or longer, so-called “durable goods”, fell in May for the second month in a row, registering its biggest drop in six months. The Commerce Department reported that durable-goods orders slipped 1.1% last month following a similar decline in April. Economists had only expected a -0.8% decrease. The consecutive declines come as businesses continue to anxiously await tax, health care, and regulatory relief promised by President Trump during his campaign. In the details of the report, orders for aircraft sank nearly 12% last month, while orders for new autos rose 1.3%. Stripping out aircraft and autos, so-called “orders ex-transportation” rose 0.1%, their fourth gain out of the last five. Non-defense capital goods orders excluding aircraft, or “core” capital-goods orders fell 0.2%, marking their first decline of the year. Blerina Uruci, an economist with Barclays noted, “We see the core data as consistent with soft business investment in the second quarter.”

Confidence among American consumers continued to rise, according to the Conference Board’s latest consumer confidence index reading. The index rose to 118.9 in May, an increase of 1.3 points from April. The increase exceeded economists’ forecast of a reading of 116. In the details of the report, the “present situation” index, which tracks how consumers view the current health of the economy, rose to a nearly 16-year high of 146.3. However, consumers don’t think the economy will be much different six months from now. The “expectations” index fell to 100.6 from 102.3. Lynn Franco, director of economic indicators at the Board stated, “Overall, consumers anticipate the economy will continue expanding in the months ahead, but they do not foresee the pace of growth accelerating.”

As far as spending, American consumers barely increased their outlays and chose instead to save more money, according to the Commerce Department. Consumer spending rose just 0.1% last month after back-to-back gains in April and March. The slight increase took place against the backdrop of slowing inflation. The Federal Reserve’s preferred inflation gauge, the PCE (personal consumption expenditures) index fell 0.1%, marking its second decline in three months. In addition, the 12-month rate of inflation fell to 1.4% in May, falling from 1.7% the previous month. The Federal Reserve has been quoted as targeting an inflation growth rate of 2%. Instead of spending the money from reduced inflation, Americans chose to save it instead. The savings rate jumped to an eight-month high of 5.5%.

International Economic News: The governor of the Bank of Canada said it looked like the low interest rates implemented in 2015 have “done their job”, but stopped short of giving an indication of future moves by the central bank. The Canadian economy continues to recover from the consecutive shocks of the financial crisis of 2008 and the sudden decline in oil prices in 2014. Statistics Canada reported the Canadian economy grew 0.2% in April compared with an increase of 0.5% in March. Service-producing industries gained 0.3%, while goods-producing industries were essentially unchanged. In an interview, Bank of Canada Governor Stephen Poloz stated the Canadian economy will likely moderate in the coming months but still remain “above potential.”

In the United Kingdom, the Office for National Statistics reported the U.K. economy grew just 0.2% in the first quarter of the year, making it the worst performing major economy in the world and the European Union. GDP had been originally estimated at 0.3% but was revised down. According to the data, business services and construction supported growth, while consumer-driven industries such as retail and accommodation weighed. Consumers in Britain have suffered a sharp loss in confidence due to rising inflation and weakening wage growth. Research firm GfK reported its latest measure of consumer confidence sank to -10, 3 points weaker than its median forecast.

French President Emmanuel Macron took the first step toward major labor market reforms, a task that none of his predecessors from across the political spectrum were willing to undertake. Macron’s cabinet approved a broad outline of changes to the labor code and is asking parliament for the authority to negotiate the details with unions and business groups. The government plans to introduce the new framework by decree, to avoid getting impeded by debates and numerous amendments. Finance Minister Bruno Le Maire said, “The labor-market reform is the mother of all reforms, both from an economic and social point of view. While the context is favorable, we must not waste a minute.” The French economy just recorded its strongest six-month period of growth since 2010. With his political capital at a high, Macron is anxious to show France’s European partners that he can deliver on the long-overdue labor reforms.

German Chancellor Angela Merkel stated in a speech to parliament that the future of Germany and the EU lies in a French and German-led Europe. The Chancellor made it abundantly clear that her nation is pivoting away from a US and United Kingdom dominated world. In the speech, she stated that Germany and France will take a greater role in leading the European Union, and Europe must take a greater role in leading the world. Merkel spoke specifically of France and that she had talked to French President Emmanuel Macro about a “medium-term plan for deepening the EU and the euro zone.” She also added that German and French interests were “connected in the closest possible way.” The German chancellor argued that the EU was recovering from its economic crisis, with all 27 remaining members recording growth and lower unemployment. The UK, Merkel suggested, was no longer at the center of European plans.

In China, despite challenges facing the world’s second largest economy, views were predominantly optimistic at the World Economic Forum meeting in Dalian. Premier Li Keqiang delivered the opening speech, touting the idea of a Chinese economy driven by innovation. China has been characterized as being an economic “copycat”, with its strength due to manufacturing the ideas and innovations of other nations. China needs to “eliminate barriers” to foreign investment and create jobs to spur growth in the country, Premier Li Keqiang said. The premier also made it clear that Beijing was aware of risks facing growth, and asserted the authorities were equipped to handle them. Helen Zhu, managing director and head of China equities at Blackrock, noted that China’s growth momentum remains strong.

Japanese industrial output fell at its fastest pace at any time since the devastating earthquake of March 2011. In addition, inventories hit their highest in almost a year, suggesting that the nation’s tepid economic recovery may stall. A decline in household spending also weighed on the economy putting Japan’s 2% inflation target farther out of reach. Hiroaki Muto, an economist at Tokai Tokyo Research Center stated, “Production looks like it will enter a period of stagnation. If production is weak, consumer spending is unlikely to strengthen. The BOJ may have to lower its consumer price forecasts.”

Finally: While past week marked the end of the first half of the year, what can we expect as we enter the second half? Chris Verrone, technical analyst at Strategas Research Partners, released a note pointing out that stocks are “approaching the more difficult stretch of the calendar.” Verrone pointed out that the average performance of both the S&P 500 and Nasdaq 100 over the last 30 years typically trade lower during the upcoming 4-month period —a slight adjustment to the “Sell in May and Go Away” Wall Street adage of old. While equities have risen about 9% the first half of the year, “defensive” assets such as gold and bond prices have also climbed. This suggests to Mr. Verrone that a significant number of investors are skeptical of the eight-year bull market. Other analysts shared similar research. Robert Sluymer, technical analyst with Fundstrat Global Advisors wrote in a note, “Our monthly cycle data continues to support a more cautious technical outlook heading through the summer into the fall.”

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 11.50 from the prior week’s 9.00, while the average ranking of Offensive DIME sectors fell to 18.75 from the prior week’s 17.25. The Defensive SHUT sectors maintained their lead over the Offensive DIME sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 25.35, down from the prior week’s 25.88, after having earlier reached the level also reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) turned negative on January 15th, and remains in Cyclical Bear territory at 50.56, down from the prior week’s 52.03.

In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) turned negative on May 12th. The indicator ended the week at 28, down from the prior week’s 29. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second quarter of 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is negative (Fig. 3), indicating a new Cyclical Bear may have arrived. The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.

In the markets:

The event that was never supposed to happen, happened. In a surprise upset, the people of the United Kingdom voted in favor of leaving the European Union. This triggered an avalanche of selling across global markets, all of which had rallied in anticipation of the “sure thing” win for the “Remain” side. On Friday the Dow plunged -610 points, erasing substantial gains from earlier in the week and a lot more, closing at 17,400, down -1.55%. The tech heavy NASDAQ composite fell -92 points, ending the week at 4,707, down -1.9%. The LargeCap S&P 500 dropped ‑1.63%. MidCaps and SmallCaps also lost ground, with the S&P 400 MidCap index giving up -1.5%, and the Russell 2000 small cap index also lost -1.5%. In a flight to safety, the defensive Utilities sector managed to avoid much of the carnage, down only -0.13%. The week’s declines brought the S&P 500, the Dow Jones Industrials, and the small cap Russell 2000 index all back into negative territory for the year to date (where the NASDAQ already was).

In international markets, Canada’s TSX fared relatively well with only a slight decline of -0.07%. In Europe, somewhat surprisingly the United Kingdom’s FTSE actually ended up at +1.95% (helped considerably by the plunge in the British Pound). However, on Europe’s mainland, Germany’s DAX ended down -0.77%, France’s CAC 40 gave up -2.08%, and Italy’s Milan FTSE plunged over -7%. In Asia, markets were mixed with China’s Shanghai Stock Exchange losing -1.07% and Japan’s Nikkei plunging over -4.15%. However, Hong Kong’s Hang Seng Index rose +0.44%.

In commodities, precious metals were strongly bid up in the wake of the Brexit vote, with Gold rising $17.50 to $1,319.10 an ounce, up +1.34% and silver rising $0.30 to $17.82 an ounce, up +1.71%. The industrial metal copper saw its second week of buying, up +3.14%. Crude oil continues to consolidate after its strong gains earlier in the year. West Texas Intermediate crude oil fell -$1.29 to $47.57 a barrel, down -2.64%.

In U.S. economic news, the number of Americans filing for unemployment benefits fell to a near-43 year low as weekly jobless claims fell 18,000 to 259,000. Economists polled by Reuters had forecast initial claims falling only to 270,000. Claims have now been below 300,000, a commonly accepted threshold of a strong job market, for 68 straight weeks– the longest streak since 1973. Continuing claims, a reading on the number of people receiving ongoing unemployment assistance, also fell by 20,000 to 2.14 million last week.

In housing, U.S. existing-home sales rose at the fastest pace since 2007. The National Association of Realtors reported that sales were up +1.8% last month to a seasonally-adjusted annual rate of 5.53 million. In addition, prices climbed to a new all-time high. The national median sales price for a previously owned home rose +4.7% from a year earlier to $239,700. Existing home sales make up roughly 90% of the housing market. Gregory Daco, head of US macroeconomics at Oxford Economics, stated that “housing demand is likely to remain solid in the coming months, underpinned by gradually strengthening wage growth and low mortgage rates.”

In contrast to existing-home sales, however, new-home sales declined -6% to an annualized 551,000 in May, according to the Commerce Department. The pullback wasn’t completely unexpected due to the outsized jump in new-home sales in April. While new-home sales are volatile and subject to heavy revision analysts point out that the overall trend remains up. The median price of a new home was $290,400, up 1% from a year ago. Throughout this tepid economic recovery homebuilders have been reluctant to resume the blistering pace of home-building that occurred prior to the housing bust.

In manufacturing, the Chicago Fed’s national economic index dropped sharply as factory output slowed. The index fell to -0.51 last month from a positive 0.05 in April. Most economists had expected an improved reading. The Chicago Fed index is a weighted average of 85 different economic indicators. All four broad categories of indicators decreased from April as weakness was broad-based. The index’s three month moving average, used by analysts to offer a clearer picture of the trend in economic activity, fell to -0.36, the lowest since August 2012.

In contrast to the Chicago Fed’s national report, the Kansas City Fed’s Regional Manufacturing Index rose +7 points to a positive 2 for June– the first positive reading in 18 months and all components were at their strongest levels for 2016. Specifically, the report noted a sharp improvement in the production index to 12 from -11 the previous month, with the components for shipments, new orders, and order backlogs all rising strongly.

American businesses were pulling back from purchasing new equipment as new orders for durable goods—airplanes, industrial machinery, and other products that are designed to last at least 3 years – fell a seasonally-adjusted ‑2.2% last month, according to the Commerce Department. That was a sharper decline than the ‑0.4% economists had forecast. While the drop was led by a -34% plunge in military-aircraft orders, orders were down across the board. Ex-transportation, orders fell -0.3%, and ex-defense spending, orders fell -0.9%. Barclay’s economist Jesse Hurwitz wrote in a note to clients that the report showed “broad-based and persistent softness across the U.S. manufacturing sector.” New orders for non-defense capital goods (a proxy for future business investment), also fell -0.7%.

In Europe, the Brexit vote dominated all market and economic news both before and (especially) after the vote became history. All markets were higher for the week before the vote, and all (save for the UK) were lower for the week after the vote.

The huge drop in the value of the British Pound was the single biggest move, hitting the lowest level versus the U.S. dollar since 1985.

The Eurozone manufacturing sector bounced in June. Markit’s Flash Manufacturing Purchasing Managers Index (PMI) rose to 52.6 in June, up +1.1 points from May and well above the expectation of 51.3. However, while manufacturing improved, the composite (manufacturing +services) PMI fell to a 17-month low of 52.8, down -0.3.

The German stock index, the DAX, fell -1000 points after the Brexit vote, the biggest drop since the financial crisis in 2008, and finished the day down -700. Key business groups in Germany have said that the uncertainty will hit the German economy particularly hard. The president of the Federation of German Wholesale, Foreign Trade and Services, Anton Barber said “Brexit has happened in a time of uncertainty. That is poison for the economy.” German industry is particularly concerned about any effects on trade with the UK, which is its third-biggest export market.

In Japan, representatives of the Japanese government and the Bank of Japan are set to hold meetings over the weekend to analyze the economic impact of Britain’s exit from the European Union. The focus of the meeting will be its impact on the global economy, negative effects on the yen, and the interests of the many Japanese companies on British territory. Japanese finance minister Taro Aso said his government will take “firm action on the yen, if needed”, however he stopped short of promising currency intervention or whether Japan had already intervened in the market.

In China, analysts are concerned that China may feel the effects of the “Brexit” vote particularly strongly. Over the years, Britain has played a significant role in promoting Chinese relations with the European Union, which has become China’s largest trading partner. Britain’s exit may lead to difficult trade and investment agreements between China and the bloc. He Weiwen, co-director of the China-US-EU Study Centre under China’s Ministry of Commerce stated “The European Union [without the presence of Britain] is likely to adopt a more protectionist approach when dealing with China. [The cooperation between China and the EU] may become more difficult.”

Finally, attempts at forecasting future market returns over coming 10-year periods have mostly focused on measurements of market valuation. The well-known Cyclically-Adjusted Price-to-Earnings ratio (CAPE) is a prominent example. Another is Warren Buffett’s favorite: US stock market capitalization divided by US GDP. Both have good records of predicting future returns when at high or low extremes – and both are predicting poor returns over the next 10 years.

But one with an even better statistical correlation to future returns (an “r-squared” of 0.91, for you geeks), does not use market valuation at all! Rather, it is based on the percentage of all household financial assets that are invested in the stock market. The higher the percentage, the lower future returns. Currently, households are at the high end of the historical range, at 52% vs the long-term median of 44%. This level portends future 10-year annualized returns of slightly less than 4%, joining the late 60’s, 2000 and 2007 as years with similar readings.

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 12,5, down from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 10.8 from the prior week’s 11.8. The Offensive DIME sectors now lead the Defensive DIME sectors by a small margin. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.81, up slightly from the prior week’s 29.79, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 69.08, up from the prior week’s 68.72.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 22, down from the prior week’s 23. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering April, indicating positive prospects for equities in the second quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: The major U.S. market indexes ended the week mixed. The tech-heavy Nasdaq Composite index had its second down week as the sell-off in mega-cap tech shares continued to weigh on the market. Of note, the Nasdaq’s so-called FAANG companies of Facebook, Amazon, Apple, Netflix, and Google represent well over $2 trillion in market capitalization alone. For the week, the Dow Jones Industrial Average gained half a percent to close at 21,384. The Nasdaq fell -0.9%, or 56 points, ending the week at 6,151. By market cap, large caps outperformed their smaller cap brethren. The S&P 500 large cap index was essentially flat, rising 0.06%, while the S&P 400 mid cap index fell -0.23%, and the small cap Russell 2000 retreated -1.05%.

International Markets: Canada’s TSX fell -1.8%, giving up this year’s gains. The United Kingdom’s FTSE also ended the week down by pulling back -0.8%. Major markets ended in the red across the board on Europe’s mainland. France’s CAC 40 retreated -0.69%, Germany’s DAX fell -0.49%, and Italy’s Milan FTSE gave up -0.86%. Markets were red in Asia as well. China’s Shanghai Composite fell -1.1%, along with Japan’s Nikkei which declined -0.35% and Hong Kong’s Hang Seng which retreated -1.55%. As grouped by Morgan Stanley Capital Indexes, developed international markets ticked up 0.1% for the week, while emerging markets declined -0.9%.

Commodities: Precious metals experienced their second down week. Gold fell -$14.90 to $1256.50 an ounce, a decline of -1.17%. Silver, gold’s more volatile cousin, also finished the week down, falling -3.26% to $16.66 an ounce. Oil had its fourth straight week of losses, retreating -1.88% to close at $44.97 per barrel of West Texas Intermediate crude oil. Copper, seen by some analysts as an indicator of worldwide economic health, retraced last week’s gain by retreating -3.23%.

U.S. Economic News: The number of Americans applying for first time unemployment benefits fell 8,000 to 237,000 last week, according to the Labor Department. New applications for benefits have remained under the key 300,000 threshold, used by analysts to indicate a “healthy” jobs market, for 119 straight weeks—its longest run since the early 1970’s. In addition, the number of people already receiving unemployment checks totaled less than 2 million for its ninth straight week. The last time these so-called continuing claims remained under 2 million for this long was in 1973. Combined, the total number of people applying for unemployment benefits and those already receiving them is now at a 45-year low.

Confidence among the nation’s home builders ticked down slightly in June, but remained near historically high levels according to the National Association of Home Builders (NAHB)/Wells Fargo housing market index. The NAHB’s housing market index fell 2 points to 67, after a downward revision May’s earlier-reported reading of 70. Any readings over 50 indicate that more builders view conditions as improving. In the details, the components measuring current sales conditions fell 2 points to 73, along with the index measuring sales expectations in the next six months, which also fell 2 points to 76. The measure of buyer traffic likewise retreated 2 points to 49.

The National Federation of Independent Business (NFIB) said its small-business optimism index remained steady at 104.5 in May from the prior month. The flat reading was seen as a positive by analysts as the sentiment index had fallen for three straight declines the prior month. Business owners are waiting for action in Washington regarding tax relief and rising healthcare costs. NFIB President Juanita Duggan said small business owners remain optimistic that tax and healthcare reforms can pass Congress. Confidence among small-business owners still remains at historically high readings following December’s surge by the largest amount in the 40-year history of the survey. In the details, five of the ten index components gained, four declined, and one remained unchanged. Of concern, only a net 28% of owners plan on making capital outlays—well below historic levels.

Inflation at the wholesale level remained flat last month following the sharp 0.5% increase in April, according to the Bureau of Labor Statistics. Lower costs for gasoline and other fuels kept in check upward price pressures in other areas of the economy. Inflation is becoming more widespread this year after being negligible for most of 2016. The 12-month rate of wholesale inflation stood at 2.4% in May, up from zero a year earlier and just a notch below a five-year high. Stripping out the volatile energy, food, and retail trade margins, core wholesale costs fell 0.1%. The core rate of inflation was up 2.1% over the past 12 months—this is the measure that gets the most attention from Wall Street and the Fed.

For American consumers, the cost of goods and services fell last month for the second time in three months as inflation for consumers continued to recede. The Consumer Price Index, known as the cost of living fell a seasonally-adjusted 0.1% last month with the drop in the price of gasoline (again) playing a major role. For consumers, the rate of inflation over the past 12 months slowed to a 1.9% back under the Federal Reserve’s 2% target. Despite the retreat the Federal Reserve still voted to hike interest rates at its meeting this week, due in large part to the surge in price pressures that accelerated at the end of last year. In the details of the report, gas prices sank 6.4%, while the cost of food rose for the fifth straight month. Stripping out the volatile food and energy categories, the so-called core CPI rose 0.1% in May. Over the last 12 months, the core CPI fell to 1.7% in May from 1.9% in April.

Retailers in the United States reported their biggest decline in sales in 16 months with auto dealers and gasoline retailers bearing the brunt of the weakness. The reversal last month retraced most of April’s 0.4% jump in sales. Overall, retail sales continue to increase at a pace consistent with the steady growth in the U.S. economy. Sales are up 3.9% in the first five months of 2017 compared to the same period in 2016. Gus Faucher, chief economist at PNC Financial Services stated, “More jobs, rising wages, low inflation, rising home sales, and low interest rates will continue to push consumer spending forward in 2017.” Stripping out auto and gasoline sales, retail sales were unchanged according to the Commerce Department. The bright spot of the report continued to be internet sales, with an increase of 0.8%. Shoppers continued their migration from brick-and-mortar stores to internet retailers as traditional department store sales fell sharply, losing 1% in May—their worst performance in almost a year.

The Federal Reserve lifted a key interest rate and laid out its plan to shrink its massive $4.5 trillion balance sheet this week. In a move that was widely expected, the Fed raised its benchmark federal-funds rate by a quarter percentage point to 1-1.25%–its third increase in a year and a half. The move will increase the cost of borrowing for consumers and business to help stave off the threat of excessive inflation and an overheated economy. Senior Fed officials also reiterated their intention to raise interest rates just one more time this year in the face of the unexpected recent softening in inflation data. The recent weak data gives the central bank the latitude to proceed more slowly with rate hikes if it so desires. Paul Ashworth, chief U.S. economist at Capital Economics stated, “The recent run of weaker core inflation readings has clearly rattled some Fed officials.” Still, Fed Chair Janet Yellen and other prominent members point to the tight labor market as a sign that price pressures are more likely to intensify. “Conditions are in place for inflation to move up,” Yellen said in a press conference after the Fed action.

In the “City of Brotherly Love”, the Philadelphia Fed’s manufacturing index retreated 11.2 points this month to 27.6. The reading was seen as a positive because economists had expected the index to fall to 24. The decline was expected following May’s second strongest reading in almost 30 years. In the details, a slowdown in the pace of shipment growth was responsible for most of the decline. The shipments index tumbled to 28.5 from 39.1 in May. On a positive note, new orders ticked up to 25.9 from 25.4 in the previous month.

In New York, manufacturing rebounded to its highest level since 2014 in a further sign of strength for the nation’s factories. The New York Fed’s Empire State index rose over 20 points to 19.8 in June from -1 in May. The new orders index rose to 18.1 after a -4.4 reading last month. The Empire State index only tracks factory activity in New York, but economists use the data as an early indication of factory output nationwide. The Empire State Index has risen seven of the last eight months. The reading is compiled from a survey of about 200 manufacturers in New York State.

International Economic News: After two years, Canada’s economy appears to be taking a positive turn. According to the latest Royal Bank of Canada Economic Outlook, consumer spending, housing starts, and a strong turnaround in business investment are largely responsible for the continued momentum that continues to build on last year’s gains. Bank of Canada governor Stephen Poloz said the economy is rebounding on a variety of fronts suggesting that the interest rate cuts put in place in 2015 “have largely done their work.” Senior Deputy Governor Carolyn Wilkins said that Canada’s economy is picking up after a period of low oil prices in 2014. The Bank of Canada is assessing whether further economic stimulus is still required, she said. Poloz refused to make any predictions about whether that means Canadians should expect a rate hike in the near future. Naysayers, however, point to the overheated real estate market as a bomb waiting to detonate the Canadian economy.

In the United Kingdom, the Bank of England came closer to raising interest rates this week than at any time over the past six years according to its rate-setting Monetary Policy Committee (MPC). In an unexpectedly close vote, MPC members voted 5-3 to keep rates at their historic low of 0.25% on the grounds that the U.K. economy’s recent weakness would keep inflation under control. In its statement, all of the MPC members agreed that the “inflation overshoot relative to the (bank’s 2%) target could be more pronounced than previously thought.” The committee was split on whether there were enough signs of life in the economy to offset the recent weakness in consumer spending from slowing wage growth and rising inflation.

On Europe’s mainland, the Bank of France maintained its second quarter GDP growth forecast of 0.5%. In addition, it anticipated an increase in the services and construction sectors for June. The central bank’s business climate survey for the manufacturing industry came in at 105, matching April’s reading of its highest level in six years. Its business climate indicator for services reading was 101, also matching April’s number.

In Germany, apparently what’s good for Germans is what’s good for the EU. According to a paper released by Swiss-based consultancy Prognos, the German economy is responsible for 4.8 million jobs in all of Europe. The paper asserts that high demand in Germany does not slow development in neighboring countries, but actually is an important driving force behind their growth. The Bavarian Industry Association (BIA) requested the report because of the continued criticism of Germany’s current account surplus from U.S. President Donald Trump and other world leaders. In 2015, Germany imported goods worth around $620 billion (555 billion euros) from other EU countries. A downturn in the German economy would have the effect of lowering economic output across the European Union by 36 billion euros by 2023. “Our study debunks the myth that German economic competitiveness harms our neighbors,” says Bertram Brossardt, head of the BIA.

In Asia, the International Monetary Fund (IMF) reported China’s economy generally remained on solid footing but tighter monetary policy, a cooling housing market, and slowing investment will weigh on the nation’s economy in the coming months. Still, Beijing is expected to meet its annual 6.5% annual economic growth target. The IMF raised its growth forecast for the country to 6.7% as it recommended China accelerate reforms and rein in credit. Economists at Nomura forecast China’s economy will grow an annual 6.8% in the second quarter, only marginally less than the 6.9 percent in the first quarter and providing enough momentum to achieve the government’s full-year target even if there is some second-half softening.

In Japan, the Bank of Japan voted to keep its lax monetary policy intact noting that its policies were supporting improvement in the world’s third largest economy. A statement issued by the central bank said it expects demand to accelerate as the central bank held its key interest rate at an ultralow -0.1%. Of interest, U.S. pension giant TIAA plans to invest about $1 billion in Japanese real-estate. The pension is betting that “Abenomics”, has put the Japanese economy in a position that it will see solid growth in the coming years. The nearly 100-year-old firm, known for offering retirement products to teachers, plans to invest in retail and logistic sites around Tokyo and Osaka. “For the global markets that we’re looking at, the story in Japan, particularly in Tokyo, looks really interesting,” Harry Tan, head of research for Asia Pacific at TH Real Estate, TIAA’s real estate arm.

Finally: As the stock market continues to grind higher and investors become more complacent we turn our attention to one data point that has remained a “stubbornly fail-safe marker” of economic contraction since 1960. Every time Commercial & Industrial (C&I) loan balances have declined or stagnated—a recession was already in progress or was imminent. This can be seen in the following graphic, from Zero Hedge using Federal Reserve data.

On a year-over-year basis, after growing at a 7% year over year pace at the beginning of 2017, the latest bank loan update from the Fed showed that the annual rate of increase in C&I loans is down to just 1.6%–its lowest since 2011. Should the rate of loan growth deceleration persist, in roughly four to six weeks the U.S. would post its first year-over-year loan contraction since the financial crisis. This graphic illustrates how steep the decline has been.

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 8.00 from the prior week’s 8.50, while the average ranking of Offensive DIME sectors fell to 16.75 from the prior week’s 14.75. The Defensive SHUT sectors further widened their lead over the Offensive DIME sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.79, down slightly from the prior week’s 29.88, and now exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 68.72, down slightly from the prior week’s 68.81.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 23, up from the prior week’s 21. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering April, indicating positive prospects for equities in the second quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: The major U.S. benchmarks ended the week mixed, with the Nasdaq taking a plunge on Friday after analysts voiced concerns over the lofty valuations of the so-called FAANG stocks—Facebook, Apple, Amazon, Netflix, and Google. For the week, the Dow Jones Industrial Average rose 65 points to close at 21,271, up 0.3%. But the technology-heavy Nasdaq Composite index declined, sharply, its first down week in three, giving up -1.5% to close at 6,207. By market cap, smaller caps were stronger than large caps. The small cap Russell 2000 and mid cap S&P 400 rose 0.37% and 1.2%, respectively, while the large cap S&P 500 fell -0.3%.

International Markets: Canada’s TSX rose for a second week, adding 0.2%. Across the Atlantic, the United Kingdom’s FTSE weakened slightly following political uncertainty, giving up -0.3%. On Europe’s mainland, France’s CAC 40 and Germany’s DAX retreated -0.8% and -0.06%, while Italy’s MIB rose 0.9%. In Asia, major markets were also mixed. China’s Shanghai Composite rose 1.7%, while Japan’s Nikkei fell -0.8% As grouped by Morgan Stanley Capital Indexes, developed markets fell -1.4%, while emerging markets gave up a smaller -0.4%.

Commodities: In commodities, precious metals took a breather after four straight weeks of gains. Gold retreated -0.7%, or $8.80 to $1271.40 an ounce. Silver, likewise, retreated giving up -1.7% to close at $17.22 an ounce. Energy continued to weaken with its third straight week of losses. Oil fell -3.8% to $45.83 per barrel of West Texas Intermediate crude oil. But the industrial metal copper, seen by some as an indicator of world-wide economic health, rose 2.9%.

U.S. Economic News: Jobless claims remained near their lowest level in decades as the number of Americans seeking new unemployment benefits fell again last week. According to the Labor Department, initial jobless claims dropped by 10,000 to 245,000 in the week ending June 3. Initial claims count the number of people applying for first time unemployment benefits. New applications for benefits have registered less than 300,000, the threshold used by analysts to indicate a healthy jobs market, for 118 consecutive weeks—its longest run since the early 1970’s. The smoothed, four-week average of claims rose slightly to 242,000—just off a 44-year low. Continuing claims, the number of people already receiving benefits, fell 2000 to 1.92 million. Continuing claims have been under 2 million for eight straight weeks, a record not seen since 1973-74.

According to the Labor Department’s “JOLTS” report (Job Openings and Labor Turnover Survey), the number of job openings in the United States hit a record high in April as companies continue to have difficulty finding qualified applicants in the ultra-tight labor market. In a slight paradox, job openings climbed to 6.04 million available positions in April but the pace of hiring actually fell to a one-year low as further indication the economy is running out of people with enough skills to fill empty positions. In the details of the report, the majority of new openings were in the hotel and restaurant businesses, while openings for better paying manufacturing jobs fell 30,000. Even with the tight labor market, workers weren’t eager to leave their jobs to re-enter the job market. The quits rate, or the number of people who voluntarily quit their jobs for presumably higher paying ones, ticked down 0.1% to 2.1%.

The services sector of the U.S. economy continued to grow at a slightly slower but still rapid pace according to the latest reading of the Institute for Supply Management (ISM) nonmanufacturing index. ISM’s services index fell 0.6 point to 56.9 last month. Services account for roughly 70% of U.S. GDP, employing the vast number of Americans. The index is compiled from a survey of the executives who order raw materials and supplies for their firms. Anthony Nieves, from ISM stated, “The majority of respondents’ comments continue to indicate optimism about business conditions and the overall economy.” New orders retreated but that was somewhat expected given that April’s reading was a 12-year high.

In manufacturing, the Commerce Department reported that new orders for U.S. made goods fell 0.2% in April, its first decline in five months. Manufacturing, which accounts for about 12% of the U.S. economy, is being supported by a recovery in the energy sector that has led to demand for oil and gas drilling equipment. Year-to-date, orders are up 4.4% over the same time last year. Excluding the volatile transportation sector, orders were up 0.1% last month and up 5.5% compared to the same period last year. The weakness in orders contributed to an increase in inventory. Stockpiles rose a seasonally-adjusted 0.1% during the month and are 2.5% higher than a year ago.

Consumer borrowing slowed in April to its smallest increase in almost six years according to the Federal Reserve. Total consumer credit rose $8.2 billion in April to a seasonally-adjusted $3.82 trillion for an annual growth rate of 2.6%. The April increase was well below economists’ estimates for a $17 billion gain in consumer credit and the slowest monthly growth rate since August of 2011. The main source of credit growth, nonrevolving credit, which covers loans for things like education and cars, slowed sharply in April to a rather weak 2.9% annualized growth rate. Revolving credit, which is predominantly credit card loans, rose at an annualized 1.8% in April down from a 6.5% annualized growth rate in March. Consumer spending accounts for about two-thirds of the U.S. economy and economists are relying on spending to drive growth in the remainder of 2017.

International Economic News: The Organization for Economic Cooperation and Development (OECD) said Canada’s economy is growing so fast the country might soon achieve full employment, but remained concerned about the housing markets in Toronto and Vancouver “overheating”. The Paris-based think-tank projected Canada’s gross domestic product will grow by 2.8% during 2017, double last year’s pace, fueled by gains in household wealth, low interest rates, government spending, and a rebound in oil and gas industry investment. The organization’s report said, “The Canadian federal government’s mildly expansionary fiscal stance will hasten the economy’s return to full employment.” However the OECD is concerned about the housing markets in Toronto and Vancouver. The OECD thinks Canada’s economy is expanding fast enough for the Bank of Canada to hike interest rates toward the end of this year in an attempt to cool the housing markets in those cities.

In the United Kingdom, Prime Minister Theresa May called for a snap U.K. general election in the hope of strengthening her position in negotiations to take Britain out of the European Union but the gamble appears to have backfired. Rather than giving May the parliamentary support she needed, voters wiped out her parliamentary majority in a surge of support for the opposition Labour Party. Analysts were quick to point out that both May’s Conservative Party and the Labour Party campaigned on a commitment to honor the result of the June 2016 referendum when 52% of voters supported Brexit. On\ Friday, May said her new minority government would “deliver on the will of the British people by taking the United Kingdom out of the European Union.”

The OECD placed French economic growth at 1.3% this year, a downtick of 0.1% from its last economic outlook in February. However, the OECD believes the French economy will strengthen and make a modest recovery to 1.5% in 2018 boosted by “investment and consumption”. The OECD cited difficulty making projections for the French economy because of the country’s electoral calendar. Catherine Mann, OECD Chief Economist noted, “We need to know the reforms. When the National Assembly is elected, we will be in a better position to know the nature of the reform program.” Macron unveiled this week a set of measures aiming to reform trade and labor laws and to tackle the nation’s high unemployment levels.

A new global poll shows that only the Dutch are more positive about their current economic conditions than the Germans. The survey released by Pew Research Center found that 86% of Germans said they would describe their country’s current economic situation as “good”, putting Germany only slightly behind the Netherlands 87%. Sweden and India rounded out the top four with 84% and 83%. Pew surveyed nearly 32,000 people in 32 different countries for its report. The global median was just 46% of people happy with their nation’s economy. The least happy were the Greeks, where 98% of respondents described their country’s economy as “bad”.

In Asia, a surge in Chinese exports and imports signaled improvement in the world’s second largest economy, but economists’ remain concerned the momentum will be short-lived. The readings come as welcome news after a series of weak readings. Exports rose 8.7% from the same time last year, while imports expanded 14.8% according to official data. The country had a trade surplus of $40.81 billion for the month according to the General Administration of Customs. Julian Evans-Pritchard of Capital Economics wrote in a note, “The current strength of imports is unlikely to be sustained if, as we expect, slower credit growth feeds through into weaker economic activity in the coming quarters.” “Export growth is also likely to edge down but should fare better than imports given the relatively upbeat outlook for China’s main trading partners.” Growth in both exports and imports accelerated from April, defying expectations of a slowdown.

Japanese and European Union officials are looking to hold a summit in Brussels in July with the aim of reaching a broad accord for an economic partnership. A meeting between Prime Minister Shinzo Abe, European Commission President Jean-Claude Juncker, and European Council President Donald Tusk is expected to be held in July prior to a summit of the Group of 20 advanced and emerging economies. A senior EU official said he was confident that Japanese and EU leaders would reach an agreement in principle, but one contentious issue remains—the handling of tariffs on agricultural items, including dairy products. The official said Japan and the EU are expected to delay discussion of such issues until after a broad agreement has been reached.

Finally: What do you waste your money on? It turns out your answer may depend in large part on your generation. Professional resources site Hloom surveyed 2000 Americans for its report The United States of Financial Waste. Across the board, all generations from Baby Boomers to Millennials mentioned “eating out” and “letting food expire” in the top three most common responses. However, after that beliefs of what constitute wasteful spending are markedly different. For example, almost 28% of Millennials responded that they “wasted” money on alcoholic beverages, while only 13% of Baby Boomers said so. The survey didn’t reveal whether baby boomers actually drink less, or just don’t consider drinking to be an unwise use of their discretionary funds!

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 8.5 from the prior week’s 11.25, while the average ranking of Offensive DIME sectors fell to 14.75 from the prior week’s 14.00. The Defensive SHUT sectors widened their lead over the Offensive DIME sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

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